Eaton Vance Files to Start Active ETFs Using New Model

March 28 (Bloomberg) -- Eaton Vance Corp. asked U.S.
regulators for permission to start a series of actively managed
exchange-traded funds that wouldn’t disclose their holdings
daily.

Eaton Vance filed with the U.S. Securities and Exchange
Commission to open what it calls exchange-traded managed funds,
or ETMFs, the Boston-based company said today in a statement.
The funds would mirror existing Eaton Vance mutual funds and the
firm seeks to license the model to other fund providers,
according to the statement.

Active ETFs typically combine the security selection of a
fund manager with the intra-day trading and cost-saving
characteristics of ETFs. Companies interested in that hybrid
have so far been largely discouraged from opening products,
especially those focused on equities, by the SEC’s requirement
for daily disclosure of ETFs holdings. Active ETFs in the U.S.
hold $12.3 billion, less than 1 percent of assets in the $1.4
trillion ETF industry, according to data compiled by Bloomberg.

“By removing the requirement for daily portfolio
transparency, ETMFs can enable investors to access a broad range
of active strategies through a vehicle that provides the
investor benefits of an exchange-traded fund,” Eaton Vance said
in the statement.

Eaton Vance, the firm best known for selling products
designed to minimize taxes, managed about $248 billion in assets
as of Jan. 31.

Intraday Trading

If approved, the Eaton Vance products would lack an
important characteristic of existing ETFs: the ability to trade
in or out of the product at current prices. Buyers and sellers
would submit bids and offers relative to the end-of-day net-asset value of the fund, meaning the final settlement price
would depend on the fund’s value at 4 p.m.

“This is not a trading vehicle,” Stephen Clarke, head of
the Eaton Vance unit that is developing the new products, said
in an interview today. “For most investors, intraday price
discovery is more a feature than a benefit.”

Clarke said he estimates the products would provide an
annual return for buy-and-hold investors that’s about 0.5
percent higher compared with their mutual-fund counterparts
because of cost savings made possible by the ETF structure. The
savings would include trading expenses and administrative costs
specific to mutual funds.

Daily Disclosure

Existing ETFs must disclose holdings to enable market
makers to execute arbitrage trades that keep an ETF’s share
price in line with the underlying value of its assets. Eaton
Vance’s model would use so-called net-asset-value-based trading
that would allow that process to take place without full
disclosure of holdings.

BlackRock Inc., the world’s largest money manager, asked
the SEC in September 2011 for permission to open active ETFs
that wouldn’t reveal holdings daily. It hasn’t yet received
approval.

Companies have said they fear the mandatory transparency of
ETFs makes it too easy for opportunistic traders to jump in
ahead of transactions made by an active manager, allowing those
traders to benefit from resulting price changes, a tactic known
as front-running. Most ETFs are passively managed, with their
holdings mimicking indexes.

That concern isn’t as pronounced on the fixed-income side,
where the opacity and negotiated nature of transactions in the
over-the-counter bond market protect managers. Pacific
Investment Management Co.’s Bill Gross has gathered $4.3 billion
in 13 months into the ETF version of his Pimco Total Return
Fund.